How MCLR system is better than the Base Rate system?

In contrast to the Base Rate, which is controlled by the average cost of funds, the MCLR is decided by the actual cost of funds. Because rates based on this system are more responsive to changes in policy rates, the RBI introduced the MCLR.

Why do we need to move from Base Rate to MCLR?

To set the lending rates for commercial banks, MCLR has replaced the base rate mechanism. On April 1, 2016, the RBI implemented MCLR to set loan interest rates. It serves as a benchmark rate for banks internally to establish the amount of interest they can charge borrowers . Read: Types of Funds in India

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What is the Difference Between Base Rate and MCLR?

Q: What is the Difference Between Base Rate and MCLR?

The major Difference Between Base Rate and MCLR is that MCLR is affected by RBI’s transformations to the repo rates whereas Base Rate is not impacted by those changes. What is the Difference Between Green Dustbin and Blue Dustbin? What is the difference between Harappan and Mesopotamian Civilization?

By BYJU'S Exam Prep

Updated on: November 14th, 2023

The difference between Base Rate and MCLR is that MCLR is impacted by RBI’s modifications to the repo rates whereas Base Rate is not affected by those changes. Some of the top financial institutions of the country have recently revised their base rate and the marginal cost of funds-based lending rate (MCLR), benefiting lakhs of customers. However, there are many customers, whose loan interest rates are determined by the former benchmark, i.e. the base rate, given that the implementation of the two rates is separated by a period of about five years.

Table of content

1. Difference Between Base Rate and MCLR
2. Base Rate vs MCLR

Difference Between Base Rate and MCLR

The table below lists some of the differences between Base Rate and Marginal Cost of Lending Rate (MCLR):

Base Rate	MCLR (Marginal Cost of Lending Rate)
Base Rate is independent of RBI’s changes to the repo rates.	MCLR is impacted by RBI’s changes to the repo rates.
Operating costs and costs required to maintain the cash reserve ratio also affect the base.	Along with operating cost and cost of maintaining the cash reserve ratio, MCLR is also calculated considering deposit rates, repo rates, and other factors.
The typical cost of funding determines the Base Rate.	The incremental/marginal cost of funds is the basis for MCLR.
The profit margin or minimum rate of return is considered while determining the base rate.	Tenor premium is considered when calculating MCLR.

Base Rate vs MCLR

Base Rate: In July 2011, the base rate was introduced. It represents the minimum interest rate at which a bank can extend credit, with certain exclusions set by the RBI.

The following three variables that determine the average cost of funds, operating cost and negative carry to cash reserve ratio determine this.

MCLR: The minimum interest rate a bank can charge for lending is the marginal cost of funds-based lending rate (MCLR) for home loans.

It was enacted on 1 April 2016 after the Central Bank of India introduced it.
Since then, it has served as the internal standard banks use when lending to any category.
The base rate system, which was in force since 2010, was superseded by it.

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What is the Difference Between Base Rate and MCLR?

Difference Between Base Rate and MCLR

Base Rate vs MCLR

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